Rising Commodity Prices Hide Longer-Term Challenges

As major economies continue to expand moderately, it's not surprising that commodity use is increasing and many prices are rising. The Bloomberg Commodity Index is up 20 percent since early 2016. Crude oil prices have more than doubled since bottoming in February 2016. The MSCI World Metals & Mining Index of equities has risen about 90 percent since the start of 2016, topping the 30 percent gain for the MSCI All Country World Index.

Yet the rosy outlook presented by financial markets masks challenges for commodity producers from a broader transition in the economy: A greater share of economic spending is on services and a declining portion of outlays is for goods. In 1947, 61.6 percent of U.S. personal consumption expenditures was devoted to goods and 38.4 percent to services. In 2017, those shares were 32.3 percent and 67.7 percent, respectively. The same dynamic is at work in emerging economies such as China. In the services sector, consultants use some commodities via computers, but the vast majority of the output is in analysis and experience. Among goods, in contrast, vehicles are largely composed of commodities such as steel, aluminum and rubber.

Slower economic growth in China is a concern to commodity producers and exporters worldwide, especially since that country uses 40 percent to 50 percent of global production of many mineral and agricultural products, according to data from the National Bureau of Statistics of China. In fact, the ups and downs of the commodities market since 2001 can be tied to China's decision to join the World Trade Organization at the end of that year. Although big miners of copper, coal and other raw materials collectively undertook new projects that cost $1 trillion in total to take advantage of demand from China, many producers failed to realize that China was not adding much to net global demand for commodities but rather absorbing more of the global total as manufacturing shifted there and to other developing countries from North America and Europe.